Macquarie Research, :: Sugar trade flows to tighten into mid- 2011, as demand is deferred

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Macquarie Agri-view
Sugar trade flows to tighten into mid-
2011, as demand is deferred
Feature article
 Production losses over the last few months in key exporter countries have
reduced the world’s exportable surplus for 2010/11. This, in conjunction with
crop shortfalls in key destination markets which have raised import needs, is
creating a tightening trade flow balance. However, expectations for lower
prices at later dates will likely see import demand being deferred into Q2, thus
ensuring prices gain support into mid-year too. While expecting quite a lot of
volatility due to the low stock-to-use ratio of just 25%, we continue to see
prices averaging above 32c/lb in H1 2011.

Latest market update
 Coffee futures in NY rose to fresh 13½ year highs in early February to over
255c/lb on ongoing supply concerns. For the market to rally so much at a time
when seasonal demand typically eases (as winter ends) and export flow from
Brazil and Central America tends to be strong, is testament to just how bullish
the Arabica market is. Record high cash prices have improved Brazilian
producers’ financial position, so they are in no hurry to sell the remainder of
their unsold 2010 crop. This, along with slow flow out of Colombia, where
truck drivers’ strikes have been hampering coffee transportation out of the
country, is exacerbating the global struggle to get hold of quality Arabicas.
 Cocoa: New one-year highs were reached in NY to $3,390/t - as Ouattara’s
month-long imposed ban on cocoa exports from the Ivory Coast takes toll on
the market. Actual supplies have not been affected too much, given that most
of Ivory Coast’s main crop had already been exported before the ban. Cocoa
arrivals from Côte d’Ivoire reached 895,000t by end-Jan, and we suspect any
remaining volumes will slip through illegally via Ghana. However, should the
ban be extended and affect the mid-crop sales too, then the supply risks
become more real, as we believe that the industry will have less coverage by
then. As such, Macquarie still sees price risks skewed to the upside in the
short term, as financial liquidity problems are halting trade volumes, and there
remains much political unrest. Q4 2010 cocoa grindings were disappointing
for Europe, falling 2.4% year-on-year, despite being seasonally the strongest
period for demand due to Christmas demand – suggesting that processing
margins for the most remain unfavourable. By contrast, North American
grindings rose 4.6%, thanks to strong cocoa powder demand.
Cotton: Maintaining its position as the top-performing commodity across
softs, hards and energy, cotton futures have continued to rally, surging to over
185c/lb this week. Stocks remain precariously low, and mills (who for the most
are still managing to either absorb or pass on the high cotton costs) are
finding their inventory pipelines squeezed dry. Although we still expect a large
supply response (the National Cotton Council said US planting will climb 15%
to 12.5m acres), we are still some 8-9 months away before actual physical
relief is found. More demand rationing will be needed until then, as old crop
supplies have all but sold out. With 200c/lb now on the radar, it seems that yet
again, we will have to revise up our near-term price forecasts!